Professional Documents
Culture Documents
Monetary policy is the process by which monetary authority of a country, generally a central bank
controls the supply of money in the economy by its control over interest rates in order to maintain price
stability and achieve high economic growth.[1] In India, the central monetary authority is the Reserve
Bank of India (RBI). is so designed as to maintain the price stability in the economy. Other objectives of
the monetary policy of India, as stated by RBI, are:
Price Stability
Price Stability implies promoting economic development with considerable emphasis on price
stability. The centre of focus is to facilitate the environment which is favourable to the architecture
that enables the developmental projects to run swiftly while also maintaining reasonable price
stability.
Controlled Expansion Of Bank Credit
One of the important functions of RBI is the controlled expansion of bank credit and money
supply with special attention to seasonal requirement for credit without affecting the output.
Promotion of Fixed Investment
The aim here is to increase the productivity of investment by restraining non essential fixed
investment.
Restriction of Inventories and stocks
Overfilling of stocks and products becoming outdated due to excess of stock often results is
sickness of the unit. To avoid this problem the central monetary authority carries out this essential
function of restricting the inventories. The main objective of this policy is to avoid over-stocking
and idle money in the organization
Promotion of Exports and Food Procurement Operations
Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an
independent objective of monetary policy.
Desired Distribution of Credit
Monetary authority has control over the decisions regarding the allocation of credit to priority
sector and small borrowers. This policy decides over the specified percentage of credit that is to be
allocated to priority sector and small borrowers.
Equitable Distribution of Credit
The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social
and economic class of people
To Promote Efficiency
It is another essential aspect where the central banks pay a lot of attention. It tries to increase the
efficiency in the financial system and tries to incorporate structural changes such as deregulating
http://en.wikipedia.org/wiki/Monetary_policy_of_India
1/5
2/2/2015
interest rates, ease operational constraints in the credit delivery system, to introduce new money
market instruments etc.
Reducing the Rigidity
RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy.
It encourages more competitive environment and diversification. It maintains its control over
financial system whenever and wherever necessary to maintain the discipline and prudence in
operations of the financial system.
Contents
1 Monetary operations
2 Major Operations
3 Key Indicators
4 References
5 Further reading
Monetary operations
Monetary operations involve monetary techniques which operate on monetary magnitudes such as
money supply, interest rates and availability of credit aimed to maintain Price Stability, Stable exchange
rate, Healthy Balance of Payment, Financial stability, Economic growth. RBI, the apex institute of India
which monitors and regulates the monetary policy of the country stabilizes the price by controlling
Inflation.RBI takes into account the following monetary policies:
Major Operations
Open Market Operations
An open market operation is an instrument of monetary policy which involves buying or selling of
government securities from or to the public and banks. This mechanism influences the reserve
position of the banks, yield on government securities and cost of bank credit. The RBI sells
government securities to contract the flow of credit and buys government securities to increase
credit flow. Open market operation makes bank rate policy effective and maintains stability in
government securities market.
Cash Reserve Ratio
Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with
RBI in the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity
in the system and vice-versa.RBI is empowered to vary CRR between 15 percent and 3 percent.
But as per the suggestion by the Narsimham committee Report the CRR was reduced from 15% in
the 1990 to 5 percent in 2002. As of September 2014, the CRR is 4.00 percent.[3]
http://en.wikipedia.org/wiki/Monetary_policy_of_India
2/5
2/2/2015
is 9%.
Credit Ceiling
In this operation RBI issues prior information or direction
that loans to the commercial banks will be given up to a
certain limit. In this case commercial bank will be tight in
advancing loans to the public. They will allocate loans to
limited sectors. Few example of ceiling are agriculture
sector advances, priority sector lending.
3/5
2/2/2015
for unproductive purpose which does not add to economic growth but increases inflation.
Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI lends to commercial banks generally against government
securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and
increase in Repo rate discourages the commercial banks to get money as the rate increases and
becomes expensive. Reverse Repo rate is the rate at which RBI borrows money from the
commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending
of the banks which will discourage the public to borrow money and will encourage them to
deposit. As the rates are high the availability of credit and demand decreases resulting to decrease
in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the
policy.
Key Indicators
As of 23 January 2015, the key indicators are[8][9]
Indicator
Current rate
Inflation
8.0%
Bank rate
8.75%
CRR
4.00%
SLR
22.00%
Repo rate
7.75%[10]
6.75%[11]
References
1. ^ Investopedia: Monetary Policy
(http://www.investopedia.com/terms/m/monetarypolicy.asp#ixzz1aDVp7Xj8)
2. ^ CRR DATA TAKEN FROM RBI (http://www.rbi.org.in/scripts/chro_bankrate.aspx)
3. ^ [1] (http://www.rbi.org.in/home.aspx)
4. ^ SLR Data from RBI (http://www.rbi.org.in/scripts/chro_bankrate.aspx)
5. ^ Chronology of events 1991-2000 (http://www.rbi.org.in/scripts/chro_1991.aspx)
6. ^ Bank rate data taken from RBI (http://www.rbi.org.in/scripts/chro_bankrate.aspx)
7. ^ CREDIT AUTHORIZATION SCHEME CAME INTO EXISTENCE DURING THE TENURE OF P C
BHATTACHARYA (http://www.rbi.org.in/scripts/governors.aspx#bhatt)
8. ^ Current Policy Rates, Reserve Ratio (http://www.rbi.org.in/home.aspx), Reserve Bank of India
http://en.wikipedia.org/wiki/Monetary_policy_of_India
4/5
2/2/2015
9. ^ Key Indicators
(http://www.indiabulls.com/securities/market/Useful_Information/Credit_Policy_10_11/quarter/CPR_1Q_F
Y10.htm), IndiaBulls.com
10. ^ http://in.reuters.com/article/2014/01/28/india-rbi-policy-review-repo-rate-crr-idINDEEA0Q0K520140128
11. ^ http://articles.economictimes.indiatimes.com/2014-01-28/news/46735140_1_repo-rate-policy-rate-25basis-points
12. ^ http://articles.economictimes.indiatimes.com/2014-01-28/news/46735140_1_repo-rate-policy-rate-25basis-points
13. ^ Hike in repo and reverse repo rate (http://profit.ndtv.com/news/show/rbi-raises-repo-rate-by-0-25-loans-tobecome-dearer-184674)
Further reading
CRR, SLR, Repo Rate Historical Charts
(http://craytheon.com/charts/rbi_base_rate_repo_reverse_rate_crr_slr.php)
Retrieved from "http://en.wikipedia.org/w/index.php?
title=Monetary_policy_of_India&oldid=645281653"
Categories: Banking in India Economy of India Economic history of India
Government finances in India Monetary policy by country Policies of India
Reserve Bank of India
This page was last modified on 2 February 2015, at 09:12.
Text is available under the Creative Commons Attribution-ShareAlike License; additional terms
may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia is a
registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.
http://en.wikipedia.org/wiki/Monetary_policy_of_India
5/5